The Dollar-Risk Trade

The US dollar once again demonstrated on Wednesday how interconnected it has growN with the general risk trade.  The dollar was the top performer on the day while the Swiss franc lagged.  Australian trade data is due later. We issue a new trade on GBPUSD with 3 supporting  charts as the existing trade nears our stop.

FX correlations shift over time and sometimes even reverse. Throughout the crisis, the US dollar was the carry funding trade. Rates were at zero and the Fed pinning Treasury yields to the floor.

But the US economy has left the crisis and ECB printing has driven carry trades into funding with euros. The high-yielding commodity currencies are also damaged with the RBA, BOC and RBNZ cutting rates. The dollar also benefits from good news anywhere now as it nudges the Fed towards hiking.

On Wednesday, ADP employment rose 237K compared to 218K expected and the ISM manufacturing report slightly beat expectations. That helped send USD/JPY to 123.21 and the US dollar about a cent higher right across the board.

The Greece story is adding to general market optimism because it's looking like Tsipras overplayed his hand. Referendum polls are showing his 'No' vote trailing or very close. EU finance ministers are now betting that he loses the vote or abandons it and takes the deal. If so, risk trades (and the US dollar) could finish the week strongly.

Asia-Pacific traders will continue to focus on the rock-and-roll Chinese stock market but it will be briefly interrupted but Australian trade balance at 0130 GMT. The consensus is for a A$2.225m deficit. Also, don't forget that non-farm payrolls is coming up in US trading.